Pastoralist market engagement in the presence of IBLI: Evidence from Nothern Kenya

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Pastoralist Market Engagement in The
Presence of Index Based Livestock Insurance:
Evidence from Northern Kenya
Eddy Chebelyon & Elizabeth Lyons
International Livestock Research Institute & UC, San Diego
June 10, 2015

Does livestock insurance coverage aﬀect participation
in livestock markets?
Market participation allows for more eﬃcient production
(Smith and Nicholson, 1887)
Despite improved access to markets, many pastoralist
households still not engaging in markets (Barrett, 2008)
Purchases and sales may increase household exposure to
risk; insurance may increase household willingness to
engage in these activities (e.g. Karlan et al., 2014)
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Pastoralist Market Engagement in The Presence of Index Based Livestock Insurance: Evidence from Northern
Introduction
Institutional Background
Extensive pastoral production takes place on around 25
percent of world’s land mass
Pastoral production provides multiple outputs: Milk, meat,
blood, hides and skins, manure
Pastoralism is risky: covariant and idiosyncratic, economic
and socials risks
To manage risk: Migration, self insurance/informal risk
sharing, income diversiﬁcation, herd accumulation and
IBLI.
3 / 21

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Introduction
Theoretical Motivation
IBLI could increase market participation by generating
incentives to increase or decrease herd size
1. IBLI may reduce household herd sizes, decrease market
purchases (Ehrlich and Becker, 1972)
Livestock is a form of self insurance (Dercon, 1998)
IBLI may substitute for larger herd sizes as a risk
mitigation strategy
2. IBLI may increase household herd sizes, increase market
purchases
Other purposes of livestock; food and status
IBLI may increase value of livestock used for these purposes
4 / 21

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Introduction
Theoretical Framework
E(Uh(L)) = λ(bh(L) − mh(L)) − ph(L) (1)
E(Uh(L)|Insurance) = λ(bh(L) − mh(L) − τbh(L)) +
τbh(L) − ICh(L) − ph(L)(2)
Where:
bh(L) is increasing and concave in L
mh(L) is increasing and convex in L
ph(L) is increasing and linear in L
λϵ[0, 1] is the expected proportion of the household’s herd that survives
τbh(L)), τ < 1 is insurance payout
ICh(L) is cost of insurance policy
5 / 21

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Introduction
Theoretical Motivation
From the First Order Conditions and the Implicit Function
Theorem we ﬁnd that:
Herd size is increasing in expected livestock survival
By reducing risk associated with livestock death, IBLI
increases optimal herd size
Testable Predictions:
IBLI increases net livestock purchases
This eﬀect is less pronounced for households who expect
more of their livestock to survive
6 / 21

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Estimation Strategy & Data
Baseline Estimating Equation
MarketParticipationit = α + βLivestockInsuranceit + σXit+
+ θRegionNDVIt + ϕYeart + ωHouseholdi + ϵi (3)
Extensions:
How does this vary with household migratory patterns and
household expectations about rangeland conditions?
Robustness:
Instrument for IBLI coverage
Price controls, alternative econometric speciﬁcations
Fewer Fixed Eﬀects
7 / 21

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Estimation Strategy & Data
Data Sources & Sample Description
This paper uses panel data collected in Marsabit over a
period of 5 years annually begining October 2009
Of the 47 sublocations 16 were selected for the study,
representing various livestock production systems and
agro-ecologies.
8 sublocations HSNP
924 households (minimum 30 and maximum 100)
2.9 percent attrition over the panel period
8 / 21

Summary Statistics: Key Dependent and Independent Variables
Full IBLI Non-IBLI
Sample Policy Policy
Holders Holders
Variable Mean Mean Mean p-value of
(Std. Dev.) (Std. Dev.) (Std. Dev.) Diﬀerence
Any Market Activity 0.564 0.618 0.554 0.008***
(0.496) (0.497) (0.486)
Net Buyer 0.102 0.147 0.093 0.000***
(0.302) (0.354) (0.291)
Net Seller 0.463 0.471 0.461 0.681
(0.499) (0.500) (0.499)
IBLI Policy Holder 0.159
(0.366)
Household Herd Size 15.042 14.984 15.067 0.936
(21.326) (17.674) (21.970)
Household Expectations about 2.921 2.867 2.929 0.218
Rangeland Conditions ( 1.053) (1.052) (1.052)
Household Migratory Patterns 1.617 1.645 1.640 0.861
(1.469) (0.510) (0.518)
Fully Settled Household 0.377 1 0.371 0.379 0.735
(0.485) (0.483) (0.485)
Observations 3269 519 2749
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Summary Statistics: Controls
Full IBLI Non-IBLI
Sample Policy Policy
Holders Holders
Variable Mean Mean Mean p-value of
(Std. Dev.) (Std. Dev.) (Std. Dev.) Diﬀerence
Household Head Marital Status 2.506 2.434 2.520 0.111
( 1.121) (1.073) (1.129)
Household Head Gender 0.381 0.384 0.380 0.869
( 0.486) (0.487) (0.486)
Household Head Age 48.709 47.517 49.139 0.040**
(17.148) (15.788) (16.596)
Household Size 6.141 6.400 6.091 0.006***
(2.352) (2.352) (2.346)
Household Financial Literacy 0.516 0.488 0.521 0.057*
(0.363) (0.359) (0.364)
NDVI -2.730 -5.513 -2.198 0.000***
(7.703) (7.521) (8.029)
Log(Distance to Nearest 4.293 4.256 4.302 0.384
Livestock Market) ( 1.114) (0.906) (1.148)
Discount Coupon 0.244 0.564 0.185 0.000***
(0.430) (0.496) (0.388)
Non-Livestock Income Sources 0.675 0.676 0.676 0.992
(0.747) (0.774) (0.742)
Observations 3269 519 2749
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Livestock Market Activity and Livestock Insurance
(1) (2) (3) (4) (5)
Dependent Variable Any Market Activity Net Seller Net Buyer
IBLI Policy Holder 0.064*** 0.056** 0.060** 0.041 0.019
(0.024) (0.025) (0.029) (0.031) (0.020)
Household & Year No No Yes Yes Yes
Fixed Effects
Household and No Yes Yes Yes Yes
Environment Controls
Observations 3,269 3,269 3,269 3,269 3,269
R-squared 0.003 0.004 0.010 0.009 0.016
Number of households 959 959 959 959 959
Notes: Standard errors clustered by household are in parentheses. * significant at
10%; ** significant at 5%; *** significant at 1%
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Livestock Insurance, and Livestock Market Activity: IV
Estimation
(1) (2) (3) (4)
Dependent First Stage Any Market Activity Net Seller Net Buyer
Variable
IBLI Policy 0.110 -0.018 0.128*
Holder (0.112) (0.115) (0.070)
IBLI Discount 0.213***
Coupon (0.017)
F-Statistic 26.06***
Observations 3,269 3,269 3,269 3,269
Number of hhid 959 959 959 959
Notes: Standard errors are in parentheses. Controls for household characteristics,
rangeland conditions, and year and household fixed effects are included in all
regressions. * significant at 10%; ** significant at 5%; *** significant at 1%
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Livestock Insurance, Household Status and Livestock
Market Activity: IV Estimation
(1) (2) (3) (4) (5) (6)
Fully Settled Partially Settled,
Households Nomadic Households
Any Market Net Net Any Market Net Net
Activity Seller Buyer Activity Seller Buyer
IBLI Policy Holder -0.144 -0.139 -0.005 0.041 -0.067 0.108
(0.269) (0.315) (0.228) (0.133) (0.131) (0.072)
Observations 1,234 1,234 1,234 2,035 2,035 2,035
Number of households 674 674 674 764 764 764
Notes: Standard errors are in parentheses. Controls for household characteristics, rangeland
conditions, and year and household fixed effects are included in all regressions. * significant at
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Results
Livestock Insurance and Survival Expectation: IV Estimation
(1) (2) (3) (4)
First Stage Any Market Net Net
Activity Seller Buyer
IBLI Policy Holder 0.132 -0.177 0.309**
(0.212) (0.219) (0.133)
Household Expectations about 0.004 0.013 -0.008
Rangeland Conditions (0.015) (0.015) (0.009)
IBLI Policy Holder* Household -0.009 0.059 -0.068*
Expectations Rangeland Conditions (0.066) (0.068) (0.041)
IBLI Discount Coupon 0.207***
(0.045)
IBLI Discount Coupon* Household 0.330***
Expectations about Rangeland Conditions (0.047)
F-Statistic, Discount Coupon 24.43***
F-Statistic, Interaction 26.92***
Observations 3,268 3,268 3,268 3,268
Number of households 959 959 959 959
Notes: Standard errors are in parentheses. Controls for household characteristics,
rangeland conditions, and year and household fixed effects are included in all
regressions. * significant at 10%; ** significant at 5%; *** significant at 1%
14 / 21

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Conclusion
Conclusion
Robust evidence that IBLI signiﬁcantly increases likelihood
of households accumulating livestock
Relationship strengthens with households that have
negative expectations
No evidence that IBLI is a substitute for larger herd sizes
Implications:
By protecting productive assets, IBLI increases
accumulation of such assets
IBLI not only protects against poverty traps, changes
incentives for investment in production
15 / 21

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Back-Up Slide
Full Set of Controls
Any Market Activity Net Seller Net Buyer
IBLI Policy Holder 0.060** 0.041 0.019
(0.029) (0.031) (0.020)
Log(Distance to Nearest 0.009 0.026 -0.017
Livestock Market) (0.045) (0.065) (0.060)
Household Herd Size -0.002** -0.001** -0.000
(0.001) (0.001) (0.000)
Household Expectations about 0.003 0.022** -0.019***
Household Migratory Patterns 0.003 0.003 -0.000
(0.003) (0.003) (0.001)
Household Head Marital Status -0.012 0.016 -0.028**
(0.035) (0.037) (0.014)
Household Head Gender 0.058 0.088 -0.030
(0.075) (0.080) (0.043)
Household Head Age 0.001 0.002 -0.001
(0.002) (0.002) (0.001)
Household Size -0.003 0.006 -0.009
(0.012) (0.013) (0.008)
Household Financial Literacy -0.002 0.049 -0.050***
(0.032) (0.033) (0.020)
NDVI -0.008 -0.002 -0.006
(0.019) (0.019) (0.005)
Observations 3,269 3,269 3,269
R-squared 0.010 0.009 0.016
Number of hhid 959 959 959
16 / 21

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Back-Up Slide
Livestock Insurance, and Livestock Market Activity:
Multinomial Logit
(1) (2)
Dependent Variable Value Net Seller Net Buyer
VARIABLES
IBLI Policy Holder 0.161 0.455***
(0.111) (0.164)
Observations 3,269 3,269
Notes: Robust standard errors are in parentheses. Controls for household
characteristics, rangeland conditions, and year fixed effects are included in all
regressions. Excluded dependent variable value is neither net seller nor net buyer.
* significant at 10%; ** significant at 5%; *** significant at 1%
17 / 21

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Back-Up Slide
Livestock Purchase & Changes in Herd Size
Dependent Variable Change in Herd Size
VARIABLES
Net Buyer 4.266***
(1.287)
Observations 3,145
Number of Households 920
R-squared 0.042
Notes: Standard errors clustered by household are in parentheses. Controls for
household characteristics, livestock insurance coverage, rangeland conditions, and
year and household fixed effects are included in all regressions. * significant at
18 / 21

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Back-Up Slide
Livestock Insurance, and Livestock Market Activity:
Price Controls
(1) (2) (3)
Dependent Variable Any Market Activity Net Seller Net Buyer
IBLI Policy Holder 0.066** 0.050 0.016
(0.030) (0.031) (0.020)
Household Expectations about 0.004 0.023** -0.019***
Observations 3,268 3,268 3,268
R-squared 0.011 0.012 0.019
Number of households 959 959 959
household characteristics, rangeland conditions, camel, cattle, and shoat prices,
and year and household fixed effects are included in all regressions. * significant at
19 / 21

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Back-Up Slide
Household Status and Income Sources
Dependent Variable Non-Livestock Related Income Sources
VARIABLES
Fully Settled 0.510***
(0.032)
Observations 3,090
R-squared 0.235
household characteristics, rangeland conditions, and year fixed effects are included
in this regression regressions. * significant at 10%; ** significant at 5%; ***
significant at 1%
20 / 21

Pastoralist market engagement in the presence of IBLI: Evidence from Nothern Kenya

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Pastoralist market engagement in the presence of IBLI: Evidence from Nothern Kenya